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Interested in understanding how treasury operations go from transactional to strategic? Welcome to CurrencyCast. My name is Agustin Mackinlay. I'm the Senior Financial Writer again talks on your host today. We have the pleasure of receiving and introducing Francisco, de Barros, Assistant Treasurer at Ingersoll-Rand. So, Francisco, a very warm welcome to you and thank you for joining us today on CurrencyCast.
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No, Agustin thanks for bringing bring me on, very excited to talk about this topics which are that near and dear to my heart so, happy to be here. All right look Francisco can you introduce yourself please. Yeah, I’m Francisco de Barros, I'm the Assistant Treasurer at Ingersoll-Rand, right? I have been in Treasury for over 15 years now, spent through a few different companies in the industry.
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Started my career with Tyco International in the audit team, from then migrated to Treasury, stepped outside of Treasury for a little bit to get some of the core business experience that allows Treasuries to be a better business partner. From there I went to AbbVie, when AbbVie was spinning off from Abbott, and now back into the industrial space with Ingersoll-Rand, where I have been for the past three years. All right, now
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Francisco, what's the typical day of an Assistant Treasurer at a large multinational company with presence and sales in more than 100 countries?I think that what I like best about Treasury ‘cause no day is the same, right? Every day is a little bit different, I think the typical day we just try to catch up
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what has happened overnight, if you will. Right we have to follow the same model from a cash management, from a credit risk management and capital markets perspective. So this basically getting you up to speed what has happened or may have happened overnight that may have missed. Looking at your morning cash position, make sure there is no liquidity there and I'm sure are going to talk about this a little bit, as on the key pieces. And then kind of blocking and tackling what you have for the day, either be on capital markets, operational efficiencies, risk management, and also work with senior management to how to improve Treasury as a business partner.
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Right. And to deliver in this strategy of the company, which now is becoming a bigger and bigger part of the strategic picture for any company. That's right, we're going to discuss that now. It sounds like a pretty busy day. Let's start our conversation by discussing the dollar strength. Now, at Kantox we are reluctant to discuss currency markets really because we think exchange rates are unpredictable.
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But I saw the other day an analyst quoted by Bloomberg that says that the dollar, the strength of the dollar, might cause some problems in terms of your earnings. But I also went to your financial statements and you say that FX has roughly a 1% impact on guidance for overall sales. That seems to me pretty manageable,
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is that right? And how do you do it? Yeah, I think it starts with the strategy of the company, right. I see, when you talk about FX, you have for those folks it started, there’s two pieces right. They had a transactional FX, which they kind of try to manage right. And you have the translation FX, which is the conversion of what they earned into the foreign currency. For us the strategic decision was made long ago that we tried to build in country for the country interest rate of our business, which by itself kind of help us to reduce the transaction of exposure,
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Right. So that's the biggest part of it. And the second part is really kind of looking at your cash flows on those foreign currencies, right. And when you try to set guidance for the year, we have high expectations of kind of, you know, what the expected currency should be given on market trends. And going back to my initial comment, no, to being updated on what the market is and make the projections from a strategic vision.
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Right. So when we put that guidance out there, we expected the dollar to have that, you know, the path that has been taken this year. Of course, no one is ever 100% accurate. But we have been able to somewhat closely resemble to expect the trajectory to be in what's taken place. Right, now, I see that just very recently, both S&P and Fitch Ratings upgraded your debt to the triple B-minus, and that's investment grade.
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So my first reaction is congratulations! But look, if you read the statement by Fitch Ratings, it says that they undertook that upgrade to your debt, among other reasons, because they say that there are in place, at your company, policies that contribute to a lower variability in free cash flow. Now, that to us, that's particularly so exciting and interesting.
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And of course, the question is, to what extent, if any, Francisco does risk management and perhaps even foreign exchange risk management make a contribution towards smoothing the path of free cash flow? Do you apply, for example, layered hedging programs? Yeah. So I mean, the free cash flow program is really the result of a much longer work that we started no many, many years ago.
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Right. It really started with, no, teaming up and partnering with the Finance team to look at business fundamentals. Right. We have something at Ingersoll-Rand called the IDX, is the operating model where we meet in a quarterly basis to discuss priorities for the quarter right and is tracked monthly. Right. So as senior management, the first thing that we did out there was what the vision for Ingersoll-Rand.
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Right? And we wanted to be investment grade, right. We are a growth company, that became very clear from discussions that we had to the banks and the investor community, right. So having that foundation of where we are and what we want to be right. The second step was, okay, how do we get to the top tier of our group, right?
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Is it margin, growth, more percentage? And kind of the first piece was working capital. That's the first thing that’s kind of addressed from DSOs, DPOs, right, the liquidity piece of the corporation. The second step was looking at our capital allocation model, which accommodated the features S&P made. Right and actually the are probating us more related to our refinancing right of that capital, of a capital structure, if you will. Ingersoll-Rand looked at it operationally.
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We have always been investment grade, but we had to leverage in event because of the merger between Ingersoll-Rand and Gardner Denver that took the leverage out, therefore got downgraded right. And it just worked with the rating agencies to help them to understand where we are and where we want to be. So part of it was a debt issuance to kind of help the transition of a secured capital structure to unsecured right.
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And the comment that they're referring to was more like it could be foreign upgrades, right, if we continue to do M&A. Which is something that's going to continue to do both that senior management has stated. Right And the policies that you know, help to reduce variability of cash flow and that really is that income for the country that we discuss right. It is been laser-focused on the working capital measures like DPO,
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DSO, which kind of track very closely. And Treasury kind of starting self into strategic partnership to drive costs out from a bank perspective, from a financial perspective. And also help to support supply chain finance programs. You know in short collectability and the trade finance is a big part for us. So it is a multi-pronged approach that help us to have that variability.
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And then, of course, holding the team accountable for it. Right. So we have guidance out for the quarter, we are tracking on a weekly basis. Right. And to make sure that everybody's leaning in and everybody's accountable for it. So that is a work in progress that I expect to cotninue for many, many years as we may have made great progress, but we are not where we want to be yet. Right now.
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But if there is that contribution that finance can make in terms of again, lowering the variability of free cash flow, that's at the very heart of issues like lack of cost of capital, like firm valuation. So that really, really goes into what we said at the beginning, right? We go from purely transactional to a lot more strategic.
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Is that right? That's correct. And look at Treasury, obviously you have three pieces, you have the cash management, which is the foundation, right. Then you have the debt capital markets, which is your debt, and then you have what we call the corporate finance. And that's where kind of Treasury, I think kind of focus on and it's really like when we are doing M&A right, looking at the expected return for the M&A, what’s the cost of capital?
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Does it make sense? So we are not just helping to fund, but we are being active, participating in the discussion, does it make sense from a capital allocation perspective? And that's that comment they made about disciplined capital operation structure that we have. Right. All right, now let's move on a little bit onto the subject of, Francisco,
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every survey that I see here about treasurers, about CFOs, puts liquidity management, cash management at the forefront, as the number one priority in every single survey you see. And of course there's the old saying cash is king now, but a few months ago, right, as a tribute to the late queen of the UK, some people are saying, no, cash is not king, cash is queen.
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And the other day we had an interview with Patrick Kunz, an interim treasurer in the Netherlands who says, cash is not king, cash is not queen, cash is emperor. So further so putting forward the value of cash management, and yourself you wrote that you can mess up with anything but liquidity. So tell us, how do you go about that and making sure that at your company Ingersoll-Rand that you don't mess up with liquidity?
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Yeah, pressure is because when you think about liquidity, people are thinking this about cash, cash is of course the first foundation of this structure. Right. And I talk to my team that
cash is like electricity, right. You could switch it on and it's there when you need it, and switch it off when you don't need it. That’s a very powerful image,
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I'm going to use it. Yeah. And what does it really mean. It means that I may have a bunch of cash in the US. But when I need cash in Europe and the cash is not there, the cash in the US is no use for me. And how do I get that cash from the US to Europe efficiently?
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So you have the pipeline, or the electrical grid if you will, to transfer that electricity in a nice and efficient manner. So at least is the first way to make sure that you have that power grid in place. And that you cannot mess up because it may miss a big opportunity that be causing quarter if you have to do overdrafts,
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or if don't have the liquidity. The second piece is that if you need to transfer that cash from one direction to the other and you don’t have an FX because you don't have the right pipelines. That could be a cost, effective cost that you may lose on the hedge, it may be a swap cost to it.
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Or it may be that the FX of gains and losses may hit your P/L. Which people that you don't like. What you don't like in Finance is surprises. And I see one of the main function of the Treasury is to avoid surprises. Surprises can be positive surprise or negative surprise and talk about the fact that either one is bad, right?
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Because investors, if you are always surprised at them in a positive manner, they become accustomed to it. And every time put the guidance out, they're going to inflate that guidance. And they're not going to trust the guys because they think you're conservative. And if you're all this under-delivering then you are not doing your job. So I think liquidity is related to the ability to move the cash effectively and when needed. And also to make sure that you take out the variability of the earnings by managing your FX, by making sure that you understand what's going on. And that power grid, if you know what a power grid does with
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electricity, if it’s laid out well it helps to avoid those surprises last minute. That it always come up, right. There's always an urgency and someone either misforecast a cash or an M&A transaction came up, basically the opportunity that you need to be able to fund it. You just said that one of the ingredients here is FX management.
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And if I come back a little bit to those surveys, first I really like them. But second, I tend to criticise them a little bit because they tend to present the priorities of treasurers, and we have you as a treasurer, and you're going to have to tell me if you agree with this on the priorities of Treasuries as being neatly separated
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one from the other. So I always see that cash management at the top, then perhaps issues with raising capital, and perhaps the investments in technology, and then comes foreign exchange risk management. But again, as if those issues were neatly separated from each other, I'm not sure that this is the practical view of a trend. Or is that right Francisco? That's correct.
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I mean, they're not mutually exclusive, right. That's one piece, and also they talk about the customer’s FX, they're going to be very different depending on the organization that you are right. Every organization has a different maturity curve. Some organizations may have different type of FX exposure challenges, right, or different challenges from a capital funding perspective.
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So they tend to be generic, but they provide a lot of insight I agree with you. Trying to provide a lot of insight. And I think some time ago you may have seen, I wrote an article for Treasury Today where they're talking about centralisation or in-house banking or what have you. And everybody was talking about payments on behalf of, and collections on behalf of.
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And in my article, nobody talks about the problems with payments on behalf of right. One size doesn't fit all, even from my perspective, from a systems perspective. So I think for those conversations to be more productive, we need to dive a bit deeper, to be able to truly add value and sharing knowledge across the industry. Now, let's bring the discussion a little bit to the topic of technology and treasury operations, and technology as a way to move from that transactional view of Treasury to a more strategic one.
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We recently created an automated solution for exactly what you mentioned, in-house FX. And that solution allows to make sure that subsidiaries make internal trades, but only the headquarters are allowed to actually operate in foreign exchange derivatives. And I was discussing with an engineer yesterday about that solution, and he just stressed the point of the issue of traceability, being able to trace back all the way from an internal trade by a subsidiary to the execution of the actual hedge with a derivatives transaction.
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Well again the P/L and all of those aspects. So we are really keen on having that idea, that traceability. Meaning that each individual item along the transaction journey from an entry to position, to a conditional order, to a hedge, to an operation, and then to a payment, has its own unique reference number.
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And I know Francisco, I'm asking you this, knowing that you started out your career in Audit and so presumably you pay a lot of attention to this, or your team, to traceability issues in general, is that correct? That's right. I mean, traceability and control in Treasury has a lot to do with cash. We're also trying to prevent fraud and type of things.
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But when you talk about this, I think what you guys talking about, centralisation is really important for two things. One is cost efficiencies, but as we look in traceability, we’re talking about the payments, I'll go one step behind. Because when you talk about a centralised solution, a lot of it resides with
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the information that is extracted from the ERPs. And the first step in this whole process, and that's something that we are facing now, the challenges, we have many different ERPs, is the data that your Accounting team is feeding to the system is correct. But you should be able to have the traceability where is the source of the data first to identify that exposure.
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And aggregating that correctly before we move up the chain, because you may do a hedge based on the information that you have, but if that information is bad, you're going to be off. And you should be able to trace it back to explain, understand what went wrong. And with traceability you know where the information started from, when that invoice or that big asset was put into your balance sheet.
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So you know where it's coming from, and you understand what's driving it. So is going to help you to have better data to hege overall, is also going to help you to understand your trends. Because if you have a clean data you can project that out and become effective. So I think centralisation technology in Treasury is key.
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I think you getting more and more precision to become more efficient and more streamlined. And I told my team, I told the treasurers for Ingersoll-Rand who I partner with, if you want to succeed, we have to rely on technology. We have a very large and complex organisation with many ERPs, you know, manpower alone is not going to solve this.
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And there's a lot of heavy folks across the organisation is technology. And technology means, you know, centralisation solution, like you're mentioning, it is looking at our ERPs is the data correct, we have the right processes. So it is process, people, and performance. I think those are the three pieces that we need to look at to talk about technology. People don't think use a software machine, but really technology is the broader concept of people, performance and processes.
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And you mentioned the complexity, and of course you are the Assistant Treasurer at Ingersoll-Rand, a very, I imagine, complex operation with sales in lots of countries. And is that not like a paradox of complexity in the sense that when you go from a domestic exporter to a consolidated group with foreign representatives and then a consolidated group with foreign production units, all of this becomes so much more complex and you need to simplify right.
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And you have a perhaps more of a focus on managing net exposure, as opposed to managing the exposure in each individual transaction, would you agree with that? I agree, it has to be net exposure, right. That's important for it to source all the data to be able to centralise and consolidate, that’s why centralisation becomes important.
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Because we have to look at net exposure. If I do individual transactions, I may be creating a problem or increasing the problems that are there and creating more costs. Because if I have an entity, as you said, in the Netherlands that maybe longs dollars and I have an entity in Brazil that shorts dollars,
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I don't need to hedge if they offset each other. So I can build the efficiencies of scale. So with a large organisation becomes complexity but also becomes efficiencies of scale that you can leverage if you know how to do it. And that's what every Treasury team should be aiming to do it.
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Now Francisco, let's briefly talk here about a little bit of the some of those technology solutions that we see emerging in the Treasury landscape. We at Kantox are incredibly so fond of application programing interfaces, or APIs, that you're using in so many different contexts. So, for example, in pricing, in allowing, just as you mentioned, those ERPs to communicate with a multilateral trading platform or with a treasury management system or even in Travel with what we call booking engines.
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So we really think that application programing interfaces or APIs are really the most salient there technology application in Treasury operations. What is your view or do you keep an eye on those trends in general? We do. I particularly do. I tend to like technology by nature and so I try, I like, and I push my team.
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We have to be the best at what we do, I think there's a need to help people to grow and develop, which are another important aspect that I normally talk about. But I keep a trend out because I think there's opportunity for us to do something better with less, is always the raising that bar. I want us to be aware,
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I want us to be at the forefront. And I tell our banking partners many of the times say, hey if tyou’re piloting a program reach out to me, I'd like to be participating with you. Is an opportunity for us to do something better, is an opportunity for someone within the team to learn something new, and try to develop their skills. And also,
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I think sometimes when people have a program, an API into something very specific, they tend to be better than those very generic programs. So I think is always good for people trying to be, you know, market disruptor and I always try to engage in least with them to see does it make sense or can it contribute to the solution?
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That's right. Well, look, we I think we've touched on a lot of topics here. We started out by my mentioning the issues related to the cost of capital and how Treasury operations allow. Well, in this particular case right here to make a contribution, a positive contribution to fund valuation, reducing the cost of capital and of course, liquidity management here.
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So Francisco de Barros is very keen on that point and we're really thankful for that. And we went also to a discussion on centralisation and technology. So, Francisco, I really appreciate your participation today on CurrencyCast and well thank you again, and I'll see you next time. Very well, thanks Agustin, I was very happy to be here, I was happy to engage in the discussion and help to contribute within the industry and share information and knowledge.
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So thanks for having me on the show and, you know, happy to connect again in the future with you guys to discuss again other topics. All right. Goobye. Thank you. Bye bye.
